The latest wave of power system reform is gradually taking shape. According to recent reports, the core elements of the new plan focus on promoting direct electricity purchases and establishing a more market-driven pricing mechanism. Regarding grid companies, their revenue will now be regulated by the government, and they will no longer act as buyers or sellers of electricity. Experts suggest that as the power sector continues to reform, the transmission of electricity prices will become smoother, which could enhance industry valuation. Hydropower companies, in particular, are expected to gain significant benefits from these changes.
Zhou Yanchang, an analyst at Dongfang Securities, noted that China’s electricity market mechanism has long had many flaws, so reform was inevitable. He added that current external conditions for reform are more favorable than ever. With China’s economic growth slowing down, both CPI and PPI are at low levels, reducing potential inflationary pressures after the reform. Additionally, the power supply situation is relatively stable. As the economy slows, coal demand has dropped, leading to lower coal prices. This has improved the profitability of thermal power plants to near historical highs, which may help ease the impact of future tariff adjustments.
Since the start of this year, the government has introduced several policies to support the reform. The "Opinions on the Key Work of Deepening Economic System Reform in 2013," issued in May, emphasized advancing tariff reforms, simplifying sales tariffs, expanding the scope of industrial and commercial electricity use at the same price, improving the coal price linkage mechanism, and allowing hydropower and nuclear power to connect to the grid under a "price formation mechanism." It also called for promoting direct electricity purchases by large consumers and piloting power system reforms on the sales side. This document marked a key turning point in China's efforts to restructure its power system.
In June, the National Development and Reform Commission (NDRC) adjusted and simplified the structure of sales tariffs, merging the original eight categories into three. During the deployment of nationwide power work for the summer of 2013, the NDRC clearly stated that it would promote market-oriented reforms for electric coal and pilot power system reforms on the sales side.
According to Zhou Yanchang, the reform of direct electricity purchasing for large consumers is a crucial step in breaking the grid monopoly, giving users more choice, and driving the marketization of electricity. However, he pointed out that the reform has been progressing slowly due to a lack of incentives on the generation side, opaque transmission and distribution prices, and resistance from grid companies. Among these, the opacity of transmission and distribution prices and grid resistance are the main obstacles to direct electricity purchases, making full implementation a multi-year process. As for grid companies no longer buying and selling electricity, their income will be state-approved, based on net fees. While this shift is positive, the implementation challenges remain considerable.
Zhou also believes that the new round of power reform will greatly benefit hydropower companies. The broader context of the reform involves the re-pricing of resource products. Hydropower, being more environmentally friendly than coal-fired power, has better peak performance and a significant price gap compared to other energy sources. Currently, hydropower pricing in China does not fully reflect its value, leaving room for improvement. A rise in hydropower prices could help offset historical debts. As a public utility industry under strict regulation, it's hard to predict the exact return space in future reforms, but some hydropower companies operating at unreasonable profit levels are likely to see a trend toward more reasonable pricing.
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